Posted by: Josh Lehner | September 14, 2021

Persistent Inflation is a Risk

This morning the Bureau of Labor Statistics released the August CPI data. As expected it showed both a slowing in inflation, but still at a rate above the Federal Reserve’s target. Inflation over the coming 3, 6, 12 months is one of the most interesting economic developments to watch. This is something an increasing number of you have reached out to our office about. In our latest few forecast documents we have had a couple pages on the inflation outlook. Today I am pulling out and updating our most recent thoughts on the subject.

In recent months inflation is running hot. Much of this can be explicitly tied to reopening sectors of the economy, or shortages in the automobile industry. However, even stripping away these likely temporary issues, the risk remains that underlying inflationary pressures will remain somewhat above the Federal Reserve’s target moving forward.

On the one hand, prices in recent months have surged in sectors and activities previously restricted by the pandemic. The costs for airfares, hotels, and admissions to events are up. However these prices also dropped earlier in the pandemic. The current surge is really bringing these prices in line with where they likely would have been absent the pandemic. As such, these prices will moderate moving forward. [This morning’s report showed an unexpected decline in these prices, likely due to the delta wave, even if these broader dynamics were anticipated.]

Additionally, demand for automobiles has recovered much quicker than production has, largely due to the shortage of semiconductors needed to complete assemblies. This mismatch between supply and demand is driving the price of both new and used cars considerably higher. As computer chip production increases, and as demand slows in the face of these higher prices, the overall dynamics in the auto industry should moderate as well.

While these examples may explain a large part of the current high readings for inflation, they are not particularly interesting or pertinent to the overall monetary policy discussion. The Federal Reserve will look through temporary bouts of inflation. What the Fed ultimately cares about is persistent inflation that is higher than its 2% target on an ongoing basis. For this reason note the gray bars in the chart above. The All Other portion of the inflation readings are currently running at about a 4% annualized pace. This is well above target. How long does this last? At what point would the Federal Reserve respond to readings continuing in this range?

The key dynamics to watch here are the interactions between actual inflation, expectations about future inflation, and underlying wage and income growth. Of course all three of these are point up today, but what does the intersection between them look like in 3, 6, 9 months from today? Without the belief that prices moving forward will be higher, it is harder for firms to raise prices. Similarly for income gains, if consumers cannot afford the higher prices without sacrificing quantities consumed, then prices will slow accordingly. Such inflationary pressures will peter out on their own.

The ultimate economic risk lies in inflation proving more persistent than believed such that the Federal Reserve steps in and raises interest rates to cool the economy. Not only would this slow economic growth, but in some historical periods, it has even caused a recession. The Fed has not yet laid down hard markers on what it will or will not tolerate when it comes to inflation, nor its beliefs on just how much is transitory versus persistent. However the answers to these questions in the quarters ahead will matter considerably. To be clear, no reasonable outlook calls for hyperinflation or even mid to high single digit inflation. However, the underlying stage is set for inflation that could be modestly, yet persistently above target. Whether the economy actually experiences that or not is unknown.

Today the Federal Reserve is nearing agreement on the timing and pace of tapering, or reducing its long-term asset purchases. Many market participants expect the announcement in the next month or so with the actual tapering to begin late this year or early next. In terms of interest rates, market participants expect the first rate hike to occur in late 2022 or early 2023. The risks on the timing are balanced. A few more hot inflation prints and rate hikes may occur sooner, a few weaker monthly jobs reports and slowing inflation, and rate hikes may be pushed to later dates.

Now, one potential saving grace for inflation could be productivity growth. Not only does increased productivity raise the overall speed limit of the economy, but it also helps firms absorb higher costs without pushing them all forward onto consumers. If a business is able to produce more output with fewer workers, it makes the cost pressures on their inputs (parts and labor) more manageable. As a result, inflation in the overall economy can better be kept in check.

To date, productivity has increased during the pandemic. Output per worker in Oregon is up around 8 percent. Much of these gains have been forced onto firms where they must try and make do with what they have. Consumer demand is strong, and the firms have limited staff and production capabilities. They are doing more with less because they really have no other choice.

However, over the medium- and long-run firms can better plan for their investments which tend to raise productivity as well. Nationally, new orders for capital goods and announcements of capital expenditures are up indicating businesses are looking to invest in new plants, equipment, and software moving forward. This should make managing price pressures easier in the years ahead.

Two final notes on productivity and inflation.

First, new business formation is strong since the start of the pandemic. New firms tend to bring new products and services to the economy, and improve efficiencies and raise overall productivity. Should this new generation of businesses do likewise, productivity should continue to improve.

Second, increased production capacity should also relieve price pressures. If products are no longer supply-constrained, increased demand should result in more production and not just higher prices. As detailed in our office’s previous forecast, a number of manufacturing subsectors – food, machinery, and wood products in particular – were already at their historical limits in terms of capacity utilization. They need to expand in order to meet demand. However a similar argument applies to services like child care. A national boost to increase the supply of these, be they semiconductors, housing, or child care, as is currently being debated in Washington D.C. as part of the infrastructure and/or reconciliation bills, could ultimately prove disinflationary as it would remove current choke points in the overall economy.

Posted by: Josh Lehner | September 9, 2021

Report: Oregon’s Latent Labor Force

Oregon’s long-run economic and revenue outlook is closely tied to the state’s population forecast. The more Oregonians, particularly working-age Oregonians, the more income earned and taxes paid. Plus a larger population increases demand for new housing construction, additional pizza parlors, and the like which generates even more economic activity. However, the state does not necessarily have to experience faster population growth to see stronger economic and revenue gains. The main reason is there are already plenty of Oregonians today who are underutilized. Businesses have a wealth of potential employees, if they are able to or willing to hire from disadvantaged populations that have traditionally been excluded from the economy to a greater degree. In our office’s previous forecast we discussed how there are historical inequities built into what economists generally define as full employment (see PDF pg 18 here).

A new report titled “Reimagining Full Employment” from the Roosevelt Institute examines what the economy could look like if some of these historical inequities were addressed in the United States. Building off the major themes of the Roosevelt Institute’s work, our office developed a few Oregon-specific scenarios. What follows is a high level summary of that work.

Specifically, what would Oregon’s long-run labor supply look like if we closed the educational attainment gap between white, non-Hispanic Oregonians and communities of color? How many more workers could local businesses hire if employment rates across all segments of the population were at their historical maximum? What if women were hired at the same rate as men? All three of these potential scenarios address a specific labor market inequity, and in doing so would boost the overall potential of Oregon’s economy, including sales for local businesses and the associated taxes paid to fund public services.

Note: These scenarios and analysis is built off of potential changes seen across different cohorts of Oregonians over the next decade. Specifically these cohorts are grouped by sex (male and female), educational attainment (college graduates and non-college graduates), race or ethnicity (white, non-Hispanic, and Black, Indigenous, and People of Color), and eight different age groups (16-24, 25-34, 35-44, 45-54, 55-64, 65-74, 75-84, 85+). There are 64 cohorts in total. The scenarios also account for the increasing diversity among Oregonians, a trend expected to continue in the years ahead.

The upshot of addressing these employment disparities is Oregon, is that they have the potential to boost the labor supply much more than any realistic increase in migration ever could. By hiring to a greater degree from Oregon’s existing residents, firms would be able to tap into a much larger pool of labor in order to expand and grow. Such an outcome would be a win-win for society and the economy.

The table below summarizes the findings of these three potential scenarios. The first set of numbers indicate how much larger labor supply would be, above and beyond our office’s baseline outlook, if a particular disparity is addressed. The final number converts this into a population growth rate equivalent. Over the decade ahead, our office expects Oregon’s population to increase by 0.8 percent per year. Every increase of a tenth of a percent is a massive change in the number of potential workers in the regional economy.

The single largest inequity is the gender gap. Women are employed at lower rates than men, and earn lower wages as well. Increasing employment opportunities for half the population (women) really moves the overall economic needle. This is easier said than done, of course. In particular the largest gender gap in terms of employment is seen between moms and dads. To really address this disparity, the availability and affordability of childcare and extended care after school would really need to be addressed. The unemployment rate between women and men is not noticeably different, but that’s largely due to many moms indicating they are not looking for work specifically because they are taking care of the home or family. Flexible schedules, working from home, and broader societal changes are also likely needed to help address the gender employment gap. Ultimately if women in Oregon were employed at the same rate as their male counterparts across each cohort, Oregon’s labor supply would be more than 150,000 larger than forecasted in the decade ahead. This boost would be equivalent to seeing population growth per year of 1.3 percent instead of the baseline of 0.8 percent. In other words, migration into Oregon in the decade ahead would need to be 60 percent above our office’s forecast to generate an equal boost to the labor supply as would raising female employment rates among existing Oregonians.

The scenario with the second largest boost to Oregon’s labor supply really boils down to employing individuals at the highest rates experienced in recent decades when examining each cohort based on age, sex and educational attainment. For example, if all women of the same age and educational attainment were hired at similar rates, how much larger would Oregon’s labor supply be? These are not either/or scenarios. They simply show how large the latent labor force is even within similar groups of workers. All told, this scenario would boost Oregon’s labor force by more than 80,000 workers in the decade ahead. This is equivalent to seeing population growth per year of 1.1 percent instead of the baseline of 0.8 percent. Put another way, migration into Oregon in the decade ahead would need to be 33 percent above our office’s forecast to generate an equal boost to the labor supply.

The third scenario modeled here eliminates the educational attainment gap between white, non-Hispanic Oregonians and their Black, Indigenous, and People of Color peers. This scenario only closes the college graduate gap among the youngest age cohorts and not for the entire population. From a policy perspective it would be more likely to target higher college enrollments among recent high school graduates than it would be to send middle-age and older Oregonians back to college campuses.

Note that while raising educational attainment and closing the gap does boost Oregon’s potential labor force by the equivalent of about one-tenth of a percentage point of population growth a year — a noticeably boost — such changes are relatively small compared to the other two scenarios. The reason is twofold. First, the educational attainment gap is only closed for the youngest cohorts, leaving most of the labor force unchanged.

Second, the largest differences related to educational attainment are not employment-related, but income-related. Yes, employment rates are a bit higher for college graduates, but wages are considerably higher. The median wage for both white, and BIPOC college graduates in Oregon is about 80% higher than it is for non-college graduates of the same race or ethnicity. Therefore the biggest economic and societal boosts to raising educational attainment and addressing racial disparities will not be seen in the raw number of workers in Oregon. Rather, the bigger boosts will be seen in the income, poverty, homeowner, and taxes paid data.

Bottom Line: Addressing economic disparities raises the potential of the entire economy. Local businesses have a larger pool of workers to choose from than many believe due to the historical underutilization of many segments of the population. Faster migration in the years ahead will grow the economy, however even if stronger migration gains do not materialize, there remains considerable upside risk to Oregon’s economic and revenue growth.

Posted by: Josh Lehner | September 1, 2021

Portland’s Lagging In-Person Recovery

Coming out of the Great Recession it was the nation’s largest urban areas that turned around first. Being home to the most diversified economies also meant less exposure to housing and government, the two biggest drags last cycle. In part due to the more-plentiful job opportunities, and in part due to increased preferences for urban living, strong population gains to the larger metropolitan areas reinforced these economic dynamics, driving a stronger recovery in urban areas than in many smaller metros and rural communities.

This cycle is different. Oregon’s large urban areas are lagging the rest of the state. This is due to a number of factors including less business travel, more working from home, and all those great urban amenities being transformed into disamenities when they cannot be used or enjoyed during a pandemic. All of these are key factors impacting urban areas nationwide before one gets into any discussion of the impacts from local protests and clashes of violence. Our office’s view is that those impacts are negative, likely contributing to a larger local decline versus other coastal, and/or northern metro areas (the south instituted fewer public health restrictions). While we need better, and more granular data to do a proper comparison, the clashes of violence are likely to be more of a secondary impact, relative to the more primary impacts of working from home and lack of business travel.

Over the medium- and long-run, the Portland economy is expected to regain its position near the top of the pack. Economic growth is fundamentally about how many workers a region has and how productive each worker is. Population growth will strengthen during the recovery, bringing with it an influx of new workers and new firms that will outpace much of the state and nation. Human capital accumulation and agglomeration effects will boost urban economies to a greater degree. Plus urban areas tend to have larger pools of financial and physical capital to help drive productivity gains in the years ahead. The wildcard in terms of downtown Portland and job centers more broadly remains working from home. Ultimately where that lands, be it a couple days a week versus fully remote, will go a long way to determining the impact on commercial real estate.

However, with the pandemic still raging, the Portland regional economy is still suffering more than the rest of the state. In particular it is the in-person activities that cities usually thrive on that are seeing slower gains than elsewhere around the state. It is somewhat of an open question just how much of these differing trends can be chalked up strictly to the pandemic itself, versus how consumers behave differently across the state in response to the pandemic. Nonetheless, Portland’s in-person recovery is lagging the rest of the state.

Click here for the same charts but in horizontal layout, which doesn’t work well in blog format but does for other formats like slides and documents.

In the Portland region, the number of seated diners at restaurants is only halfway back to where it was before the pandemic, compared with a full recovery in other parts of the state, at least among restaurants using the OpenTable reservation software. Note that in recent weeks, the weakening in indoor dining is not seen in the Portland region but elsewhere in the state where cases and hospitalizations are much higher during the delta wave, and vaccination rates are likewise lower.

One bright spot for tracking the recovery in downtown Portland is that video lottery sales in the urban core have fully recovered, and set records this summer. While an imperfect measure, it does indicate that foot traffic and consumer spending are returning. However, in keeping with the broader patterns in the economy, these gains in video lottery sales are larger in the Portland suburbs, and strongest elsewhere across the state.

Lastly, the relative economic performance is seen in the employment data as well. Leisure and hospitality employment in Multnomah County remains down three times as much as in the Portland suburban counties, and ten times as much as in the rest of the state, with data available through July.

Two major contributing factors remain the lack of business travel during the pandemic, and the increased number of people working from home. Both issues work to lower the number of consumers in the urban core, while simultaneously boosting their home markets, be they out of state or in the suburbs. In some hot off the press new NBER research by Althoff et al (2021), they write when it comes to working from home that “[t]he larger a neighborhood’s initial share of high-skill service workers among its residents, the larger its decline in visits to local consumer service establishments and the sharper the drop in residents’ spending on consumer services.” The authors go on to conclude “[i]f the recent pandemic is any guide, high-skill service workers will benefit from increased spatial flexibility and make use of it, while low-skill service workers will suffer from their dependence on local demand in a more footloose world.” This pattern is borne out nationwide, and here in Oregon as shown above.

Again, over the entire cycle our office is bullish on the future of large, urban economies. And to the extent there are some structural changes nationally, Portland and Oregon more broadly are likely to benefit overall. Pre-pandemic, every region of the state was average or above average in working from home. However, the pandemic is still raging, and many in-person activities, while growing again, are still significantly below pre-COVID levels.

Posted by: Josh Lehner | August 25, 2021

Oregon Economic and Revenue Forecast, September 2021

This morning the Oregon Office of Economic Analysis released the latest quarterly economic and revenue forecast. For the full document, slides and forecast data please see our main website. Below is the forecast’s Executive Summary and a copy of our presentation slides.

The economic outlook remains bright. Strong household incomes, boosted considerably by federal aid during the pandemic, are the underlying driver. Consumers have no shortage of firepower if they want to and feel safe enough to spend. The key to the outlook remains translating this firepower into actual consumer spending, particularly in the hard-hit service industries. Firms today are trying to staff up as quickly as possible to meet this increasing demand. The actual number of jobs created this year will be the largest on record in Oregon. The state’s labor market is now expected to regain all of its lost jobs by next summer, or one quarter sooner than in the previous forecast.

While these dynamics remain intact, the risks are weighted toward the downside. Growth in a supply-constrained economy is challenging. Firms are struggling with supply chains and a tight labor market. Wages are rising quickly to attract and retain workers. Prices are increasing as demand continues to outstrip supply. On top of this the current delta wave of the pandemic complicates the immediate term outlook. What matters most economically are shutdowns. A modest pullback in consumer spending in a few categories will not lead to mass layoffs. If anything, any slowing in spending today will likely turn into stronger gains in coming quarters.

This cycle is different. The current recovery will be faster, more complete, and more inclusive than recent experiences coming out of the tech and housing bubbles. As some of the pandemic-specific challenges fade, the underlying economy is on solid footing due to the strength of corporate and household balance sheets.

In September of odd-numbered years, the revenue forecast closes out the biennium than ended on June 30th. At this time, the Close of Session forecast is calculated by folding any tax law changes made during the legislative session into the May 2021 outlook. This sets the bar for Oregon’s balanced budget requirement and its unique kicker law. Changes to tax law were relatively small in the 2021 session, with a net revenue impact of -$3.6 million to General Fund resources in the 2021-23 budget period.

The September forecast also reveals where revenues landed in the prior budget period. In a typical year, there are few surprises, since tax collections are relatively small during the early summer. This year was different. Due to a delayed tax filing deadline, much uncertainty remained following the May forecast. When the forecast was developed, the peak tax season had just begun.

By the end of the fiscal year, the 2021 tax season turned out to be a very big one. Collections of personal income taxes, corporate income taxes, lottery sales and the new Corporate Activity Tax all surged. Recent withholdings of personal income taxes are up 17% relative to last year. Payments during the tax season were strong as well, led by collections from high-income taxpayers. A $1.9 billion personal income tax kicker credit is slated for tax year 2021. The median taxpayer can expect to receive a credit of $420, while the average is estimated to be $850.

The strong revenue growth seen during the 2019-21 biennium put a cap on a decade of unprecedented expansion in Oregon’s General Fund revenues. Over the past decade, General Fund revenues have almost doubled from around $12 billion per year to around $24 billion. Over the decade as a whole, kicker payments amounted to $2.6 billion, reducing cumulative General Fund resources by 2.6%. Last biennium, kicker payments took away half of the General Fund growth. Looking forward, the current $1.9 billion kicker will reduce 2021-23 revenues as well.

See our full website for all the forecast details. Our presentation slides for the forecast release to the Legislature are below.

Posted by: Josh Lehner | August 19, 2021

Aid to Households in Oregon (Graph of the Week)

One of the main goals of federal policy at the start of the pandemic was to ensure households were kept afloat financially. The primary ways policy has been able to do this was through enhanced unemployment insurance benefits and recovery rebates. But as one of our advisors points out there were a number of other items as well including rent assistance, eviction and foreclosures moratoriums, student loan deferrals, the new child tax credit and the like. While those may be on a smaller scale, they all work toward improving household cash flow and overall finances. From a high level perspective, these federal policies have more than achieved their goal. Incomes are higher today than before the pandemic. Of course these policies all were, or are temporary. The rebates are over, UI ends in a couple of weeks, and the others are scheduled to end in a few months, although policymakers are looking to extend the CTC on its own merits and not as any sort of pandemic assistance. The good news is underlying incomes absent the direct federal aid have recovered as well.

When talking about the economy, and labor supply our office always highlights the strong household finances. We make sure to mention that it is not just unemployment insurance boosting incomes and potentially holding back some workers today, but rather you need to take a look at the overall picture. That’s one reason we do not expect a flood of job applicants the week after enhanced UI ends, even if UI is a big piece, probably the biggest, to the overall labor supply puzzle.

Case in point is this edition of the Graph of the Week. Since the start of the pandemic, recovery rebates have added about $13 billion to Oregonian incomes, and unemployment insurance about $11 billion based on the latest data from the BEA and our office’s estimates. Combined these represent an 11 percent boost to incomes over the past 18 months*.

While it looks like this chart is getting left on the cutting room floor of our forecast document next week, I wanted to make sure it was shared here on the blog as it makes a compelling visual of the impact of federal policy during the pandemic.

* 2019 statewide income was $224 billion, so (13+11)/224 = .11

Posted by: Josh Lehner | August 17, 2021

Oregon Employment, July 2021

This morning our friends over at the Oregon Employment Department released the July employment report. I think their headline says it all: Oregon’s Unemployment Rate Drops to 5.2% in July as Oregon Adds 20,000 Jobs. It was a banner report. Since it’s been a couple months since our last nuts and bolts summary, let’s do a rapid-fire run through five charts and end with a few comments on the potential impact of the Delta variant.

First, the big 20,000 monthly job gains is huge. It means Oregon has recovered 70% of its initial pandemic job losses. Today employment remains 4.4%, or 86,000 jobs below where we were in February 2020, but progress is ongoing and much faster than in recent cycles. The latest data comes in a smidge above our office’s most recent forecast, but in line with expectations. (Note that our next forecast comes out next Wednesday, August 25th.)

Second, given the nature of the pandemic and its economic impact on in-person service industries, low-wage sectors continue to be disproportionately affected. The good news is the recover is ongoing. Leisure and Hospitality added more than 7,000 jobs last month on a seasonally-adjusted basis, although the sector is still down about 20% from pre-pandemic levels. While the total number of leisure jobs will reach historic highs in the years ahead, our office has made some downward adjustments on a per capita basis, as discussed previously. Higher-wage jobs today are boosted, in part, due to their greater ability to work remotely and therefore are less disrupted by the pandemic itself.

Third, in July the largest sector increases were in local government. A lot of this nationally had to deal with seasonal factors related to education where this summer school districts did not lay off their normal amount of workers as their employment counts are already down during the pandemic with online learning and the like. I suspect this is happening in part in the Oregon data. Just a reminder that local government employment is down roughly the same as the private sector, in large part due to the pandemic. Education is down as districts use fewer substitutes, bus drivers, and nutrition workers with online learning. Public sector leisure and hospitality (zoos, community centers, etc) are down due to the virus and health restrictions. Tribal employment is down a larger percentage likely due to the leisure and hospitality (casinos and hotels) components. Here is our office’s tracking chart based on the latest detailed data which goes through March.

Fourth, speaking of education and counter to the conventional wisdom, the data continue to point to the lack of in-person schooling not being a macroeconomic constraint. No doubt it is a micro constraint for impacted families, but at the top line it is hard to see any real impacts when it comes to basic statistics like do you have a job yes or no. For example, here in Oregon the unemployment rate for women is lower than for men. A more accurate look can be found in economist Jed Kolko’s updated analysis that finds employment rates for moms are now outperforming women without children nationally. These findings are surprising to some and do run counter to the conventional wisdom. The good macro and micro news is that students will return to the classroom and to college campuses next month. This will boost the direct number of education jobs and any lingering indirect effects on parental labor force participation.

Fifth, the number of unemployed Oregonians continues to decline as jobs increase. The same is true for the number of Oregonians receiving unemployment insurance benefits. As our office has stated in the past, the number of jobs, the number of unemployed Oregonians, and the number of folks receiving UI are all moving together. This does not mean job growth could not be faster absent the enhanced benefits, but it also does not mean there is a large pool of potential workers who are not responsive to ongoing labor market dynamics. Another item to note is that the number of Oregonians who are not in the labor force — not actively looking for work — due specifically to the pandemic also continues to decline.

Finally, our office is increasingly asked about the impacts of the Delta variant given the surging cases and hospitalizations in Oregon. On one hand, what really moves the economic needle are shutdowns. More stringent health restrictions are not currently in place nor have been announced. Of course given the state of the pandemic that could change. On the other hand, there will likely be some pullback in consumer demand for certain in-person activities, be it air travel, bowling alleys, movie theaters, or the like. Given household income is strong and the stockpile of excess savings remains, any slowdown in spending today will probably be pushed forward into future months when the state of the pandemic improves. Any weaker growth in the near-term will likely result in stronger growth in the medium-term. It will be more of a shift in timing of consumer spending, rather than altering the overall trajectory.

In you check out our office’s COVID tracking page you will see that in the past week we are seeing the slightest declines in video lottery sales and OpenTable seated diners as the Delta variant surged. Nationally the number of air passengers is dropping as well (we don’t have real-time Oregon data here). Last week was the first really massive week of cases and hospitalizations, or massive enough to really grab the public’s attention it seems. As such, I’m interested to see how it impacts Oregonian behavior this week. Will it continue to be modest, or will we see larger declines in certain activities? We will have a better idea next Monday or Tuesday when the data is available.

Posted by: Josh Lehner | August 11, 2021

Why Job Openings are through the Roof

We know job openings are at record levels both nationally and here in Oregon.

The question is why are they so high? At the most basic level the answer is consumer demand is strong and firms are trying to get back to pre-COVID staffing to meet that demand. As simple as that sounds, it’s actually pretty unusual. It’s certainly different than the experiences of the past two recessions which were long-lasting, and had a clear lack of demand. It took years for consumers to return and firms to staff up. Today we know incomes are strong and pent-up demand is very real.

Even as that explanation is concise and sufficient to explain what ‘s going on, I can’t stop there. I’ve been trying to figure out how all the other factors today are impacting job openings. I’m using the accommodation and food service industry as an example below to show how some of these things impact the number of job openings, but this really applies to to all industries.

First, there is considerable amounts of churn in leisure and hospitality. Over the course of a year, roughly 60% of jobs are so-called stable jobs. That means the sector sees 40% turnover. That works out to the average business needing to fill one position every 2 months just due to industry churn and keeping total employment steady. You’ll note that the total job openings in 2019 were larger than this, I think in large part because you don’t advertise fractions of a position! (It could be part-time, but you need a whole person to fill it on a part-time basis). Plus the industry was growing, so needed more workers to expand on top of the churn.

Second, that normal churn is harder to fill today. Quits are up as workers take better opportunities with different firms, meaning there are now more open positions to fill. Plus labor supply is lower, meaning the number of people who would normally cycle into one of those vacant positions over the course of the year is lower as well. That increases openings as it takes longer to fill them. Combined these factors increase job openings by about 65% relative to that normal industry churn. That’s a huge number!

Third, there is the overall employment hole that firms are looking to fill and get all the way back to pre-COVID levels, if not higher. This is an even larger number.

Overall you will see that the current number of job openings are roughly in the same ballpark, or in the middle of those last couple of calculations. It’s clearly not a perfect calculation that scales exactly to what the data tell us, but is indicative and has been helpful for me to think through. The good news is consumer demand is there, allowing the overall economy and firms to try and get back to pre-pandemic levels faster than in recent cycles. And while that clearly is happening, it is challenging in a supply-constrained economy.

Posted by: Josh Lehner | August 10, 2021

Manufacturing Wages: It’s about the Career Path

The labor market is tighter than you think, not just for bars and restaurants as they try to staff back up but pretty much across the board in terms of industries and occupations. An interesting piece of the discussion continues to be the trades, where surging wages in leisure and hospitality now put upward pressure on lower-wage jobs throughout the entire economy in order for firms to attract and retain workers. These lower-wage jobs include many manufacturing positions.

Our office has written quite a bit over the years when it comes to manufacturing wages, the shifting nature of work within manufacturing, young adults entering into the trades HERE and HERE and the like. But today I wanted to share something I’ve been using more lately when talking with manufacturers and workforce development folks. We don’t have perfect data here but I hope the point is clear, or at least clear enough.

Starting wages for production jobs — the manufacturing jobs that actually do the manufacturing — really aren’t that much higher than in restaurants. Pre-COVID here in Oregon the hourly wages were about $1 (12%) higher. That’s not nothing, but at the same time is not a huge wage premium. The bigger boost to income is really seen among experienced workers. The median production worker in Oregon brought home $15-20,000 more than the median food preparation worker did, once you account for hourly wage, hours worked per week, and weeks worked per year, all of which are higher in manufacturing than in food service. Take home pay was nearly double at $38,400 versus $19,600 (+$18,800 or +96%). And in practical terms that pay difference is massive. It is equivalent to being able to spend an additional $470 per month on rent (using the imperfect 30% of income metric), with more available for food, vacations, and the like.

Now, in a tight labor market attracting and retaining workers is a huge challenge, so what I’ve told folks in the trades is to highlight the career path and earnings in the years ahead. That said, with the quickly rising wages in leisure and hospitality, entry level wages in manufacturing need to rise as well. Even mid-career wages will need to increase to be competitive. Pre-COVID median hourly wages in production jobs were $18-20 depending on the subsector, and even as low as $15 in food manufacturing. With starting wages in fast food approaching those levels, there is increased competition for workers.

Our office has heard from a few local firms saying this is starting to be an issue and when competing in more of a global or national market, it could make them less cost competitive. That is a worry and a challenge given the global manufacturing dynamics of recent decades. However given the strong sales environment today, now is a better time to pass along those cost increases to customers as they can better afford them without sapping demand at the same time. Looking at the wages, and the production and supply chain costs, these increases are happening. Crucially productivity has risen during the pandemic, meaning firms are producing more with relatively fewer workers, which also better allows them to pay those higher wages needed to attract and retain talent.

Two final notes:

The chart above only shows hourly wages, but we know the total compensation package is better in manufacturing as well. According to the 2019 Employer-Provided Benefits survey from the Oregon Employment Department, manufacturers offer medical, dental, and vision insurance at twice the rate as the leisure and hospitality industry.

While the hours worked piece is huge in financial terms, it can cut both ways. We know manufacturing employees essentially work 40 hour weeks (on average) while leisure and hospitality is more like 25 hours. However some people do prefer the greater flexibility of part-time work, and/or non-standard hours. The more ridged nature of full-time work does not fit the needs of some workers.

Bottom Line: Finding and keeping workers is a huge challenge for businesses today. While I am a labor supply optimist, it’s not like labor is going to suddenly become widely available this fall. I just don’t think it will remain depressed indefinitely. As a result, firms are adjusting the levers they can both in terms of financial (wages, benefits, hours) and non-pecuniary (flexible schedules, work from home etc).

Posted by: Josh Lehner | August 4, 2021

In Search of Structural Changes in the Labor Market

Clearly the pandemic has upended our lives in many ways. We’ve changed some of our behaviors and formed new habits over the past year and a half. After the pandemic wanes, some of these adjustments will stick and some will not. Even as we cannot say for certain today which will or will not stick, let’s take a look at two possibilities that are at the forefront of a lot people’s minds.

First, while I am a labor supply optimist, that does not mean there are not some underlying changes in the workforce, and in the service sector in particular. The New York Times had an interesting podcast yesterday where they talked with a few business owners and a handful of former restaurant employees about what the past year has been like. It’s not hard data, but in the midst of everything going on, anecdotes are helpful.

In short the business owners have struggled to fill job openings and largely blame the federal government and the enhanced unemployment insurance benefits for that. The workers, on the other hand, acknowledge that UI is keeping them afloat financially and are not currently willing to jump right back into jobs that are physically demanding, underappreciated by both their bosses and the customers, and pay low wages. Many former workers say they have taken the past year to improve their health (better sleep and eating habits, more exercise), and are looking for jobs with better working conditions like regular schedules, paid breaks, and the like. Research has shown some job switching into retail, warehousing, and even the postal service as mentioned by the former Portland restaurant worker on the NYT podcast.

What do I think is going on? I believe everything in the above paragraph is true. Many service industry jobs are physically demand, underappreciated, and underpaid. That’s been the case for a long time. The pandemic and the federal aid that has kept household incomes strong, has better allowed workers to assess these conditions and reevaluate what they want to do, if they so choose. I do not believe that the enhanced UI is a problem problem, and to the extent it is, it is temporary and was purposefully designed to keep households afloat during the pandemic. But we have to acknowledge it is a labor supply constraint. Within low-wage jobs, workers who qualify for UI are seeing wage replacement noticeably higher than 100%. Depending upon your assumptions, it is 130-150% wage replacement for the typical restaurant employee. Now that excludes tips, and the fact that wages have risen noticeably lately makes the opportunity costs of not working today different, but still, it’s a clear piece of the puzzle.

Ultimately where our office lands on this today is we have made some structural changes to labor within the leisure and hospitality industry. On a population-adjusted basis we have lowered our forecast for leisure and hospitality employment by about 7%. Now, the total number of jobs increase over time, reaching historic highs in level terms, but they never fully regain their pre-pandemic peak on a per capita basis. Obviously it is hard to know today what the right adjustment is and as we learn more our office will adjust our forecast further. But between shifts in business practices when it comes to not cleaning hotel rooms every single day, to more counter service and QR codes at restaurants, plus some share of the workforce looking for jobs in other industries, some downward adjustment to the labor outlook is needed.

The second potential change relates to working from home. Numerous surveys show that workers like working from home and do not want to return to the office full time. A new report from Upwork even goes so far as to show that a sizable share of workers are willing to take a pay cut to stay remote, and even become freelancers in order to do so.

Here the real question continues to be where does remote work ultimately land. Is it a couple days a week or 100% remote? That’s what’s going to matter the most and we just don’t know yet. For now our office is of the opinion it will generally be a day or three a week instead of fully remote. Case in point, the share of workers who say they are telecommuting during the pandemic continues to decline. Now, this still represents an increase from pre-pandemic rates. We do not believe everyone is going back to a full five days a week office environment, but the fully remote shares are likely to remain relatively low overall. Such changes still can have some big implications for downtowns, commercial real estate and restaurants that rely on the lunch crowd, etc, but in general most of us will return to the office in the months ahead. And keep in mind that working from home is only something that about 1 in 3 jobs can realistically do in the first place. See our previous report on working from home for more details.

The other implication of the Upwork report is something to keep an eye on and frankly could bring about larger economic changes. We know business formation is up, which is encouraging for future economic and productivity growth. But it is up even more among new companies without “planned wages” — basically the self-employed. This could be white collar freelancers, but could also include broader increases in rideshare or food delivery or other on-demand type jobs in addition to more traditional side hustles and Saturday Market type ventures. Furthermore, while not seen in the U.S. data but we do here in Oregon, at least in the unbenchmarked data, the number of self-employed is running noticeably ahead of the payroll employment data.

Overall, I am a bit more skeptical of some of these broader potential changes in the economy. I generally need to see it in the hard numbers rather than relying on anecdotes. But we have to recognize that the pandemic has upended our lives in many different ways. The changes we have made in the past 18 months, and in those still to come will stick to varying degrees. Some shifts, like more e-commerce, strong home sales and even retirements, are really just accelerating these longer-term structural changes that were already occurring. In general I would place working from home in that group as well, however to the extent it is fully remote and/or an increase in freelancing and the like, that would be a new structural change in the labor market and overall economy. As always, our office will continue to monitor the data and adjust our outlook accordingly.

Posted by: Josh Lehner | July 23, 2021

Educational Attainment Disparities (Graph of the Week)

Happy Friday! I’m working on a larger project and in the midst of doing it, created the following chart to help visualize the data. Honestly it’s a bit of a Rorschach test when it comes to the intersection of educational attainment with age, sex, and race and ethnicity. Before this gets buried, or rather embedded into the larger analysis, I wanted to elevate it be the latest edition of the Graph of the Week. So many possibilities, opportunities, and historical inequities can be seen here. Have a good weekend.

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